Using a Bridge Loan to Win a Competitive Edge
by Scott Bialek, Co-Founder of Hurst Lending
People say I’m a problem solver because I’m constantly looking for ways to help real estate investors (myself included!) be more successful and overcome common stumbling blocks. In real estate investing, creative solutions can ensure success. When purchasing investment properties, particularly in competitive markets, investors can face several challenges that block that investment purchases and return on investments. Creative solutions that minimize the impacts of limited liquid cash, bidding wars, lack of enough investment experience to be attractive to traditional lenders, and other problems is often the difference between winning the competitive edge or losing the deal. In this three-part series, I’ll describe three different solutions I’ve created at Hurst Lending for winning at real estate investing. First, let’s talk about how bridge loans can accelerate your investment success.
What Are Bridge Loans?
Bridge (sometimes called gap, interim, or swing) loans are often used by buyers seeking to finance a new home purchase while the old home is still on the market. These loans are typically for a six- to twelve-month period, carry a higher interest rate, and require at least 20% equity. They can usually be completed within 2 weeks. There’s nothing particularly competitive in that, but what if you’re seeking to buy a property as a real estate investment?
Real Estate Investment Success Case Study
Recently, I worked with an investor who had his sights set on a property in the very competitive market in Austin, Texas. As we discussed his goals, we identified some issues.
Roadblocks to Investment Success
- There were very few properties available for purchase in the competitive market.
- There were multiple buyers bidding on the property he’d chosen.
- The investor had a relatively small amount of liquid cash.
Though there were only a few issues, they were big ones that could have cost him the deal. As you likely know, cash offer almost always works to win a bidding war, but the average investor rarely has the ability to offer cash or enough experience to be attractive to traditional lenders. What options could we offer this investor to solve his problems and set him up for success?
Solution: Use Cash To Win The Deal – But How? With A Low-Cost Bridge Loan!
The investor lacked the liquid cash to purchase the property, but what if I could find a way for him to offer cash to the buyer? Cash is king, right? I developed a solution to use a short-term Bridge Loan in a different way. By offering this investor a low-cost bridge loan with only 5% rather than 20% down, we could give him affordable cash to submit his offer. Not only did that make him a far more attractive buyer, he was able to gain several edges and win the deal over other buyers because a cash deal meant:
- the seller knew they could be assured the deal would go through without any glitches or financing issues
- the seller knew that with a shortened closing timeframe, they would not have to make another mortgage payment
- closing could take place in 14-17 days rather than the traditional 30 days
The investor won several advantages, too. Not only did he win the deal, he got an affordable option that saved money because:
- with his attractive cash offer, he was able to buy the property for $10,000 below the asking price
- with the low down payment and low cost of the loan, namely a 1% origination fee plus a small amount in closing costs, he still obtained the property for less than asking price
- after winning the real estate deal, he was able to convert out of the Bridge Loan and lock in low interest, long term financing
In the end, the savings were far greater than the low cost of the bridge loan.
A low-cost bridge loan is just one of the ways we can help you win a competitive deal. Check out my next blog post on Using Soft Money Bridge Loans to Purchase an Investment Property and let us help you win the edge!